Firms need to set budgets for their marketing programme. There are a number of ways to calculate how much money should be allocated to marketing and advertising spend. These methods are illustrated in the marketing budget calculation diagram below.
Under the objective and task method, the company calculates how much money they will need to achieve their marketing objectives and complete marketing tasks. This method involves:
This a challenging method because the firm has to attempt to calculate how much it will cost to achieve their objectives. For example how much will it cost to make 50% of the target audience aware of your brand or increase product sales by 10%. The advantage of the objective and task method is that it increases the likelihood of the firm setting aside sufficient money to cover the costs of completing its marketing tasks.
The competitive parity method involves examining how much competitors are spending on marketing and matching or exceeding that spend. Advocates of the competitive parity method say that it helps firms determine what their industry believes should be spent on marketing. Opponents of the competitive parity method say that as the size and operations of companies vary, marketing budget comparisons with other firms are useless.
Under the percentage of sales approach, the firm decides to spend a percentage of current or future sales on their marketing campaign. The disadvantage to this method is that sales do not always provide an indication of future budget requirements. The other disadvantage is that deciding what percentage of sales should be used to set marketing budgets, can be challenging.
Firms that adopt the affordable approach look at how much money they have available after deducting operational costs and considering other budgets. The disadvantage to the affordable approach, is that if the marketing budget is at the bottom of the firm's priorities, there may not be much money left over for the marketing budget.
Allocating budgets is always a challenging task because it involves predicting how much money the firm will need in the future. Each of the four budget calculation methods have their advantages and disadvantages. The one chosen by each firm will depend on its resources and previous experience with setting budgets.
